Bonds Fall to Monthly Lows on Consumer Confidence

U.S. 10-year Treasury bonds fell further today,
moving to 3-month lows after the U. of Michigan consumer sentiment index came in
stronger than expected. Bonds have been falling fairly steadily since last
Wednesday’s Fed announcement, which emphasized continued vigilance on inflation.
For the past two weeks, traders have been forced to significantly reduce bets
that the Fed would be forced to cut interest rates in the near future to deal
with slowing growth. Traders will continue to closely monitor housing and other
key economic reports for evidence of an economic slowdown.

The major currencies were basically flat
across the board this morning. The dollar rose against the euro this week on
positive economic reports and hawkish Fed language. The Fed held rates last
week, but emphasized that vigilance would still be required to keep a lid on
inflation. The euro is still trading near record highs against the yen. The Canadian dollar moved to 30-year highs over the U.S. dollar. The
Canadian currency has been surging against the dollar lately, on M&A deals,
inflationary growth and rising commodity prices.

Crude oil futures rose about 0.3% today, on
continued speculation that summer demand will exceed U.S. reserve and refinery
capacities. Oil shot up yesterday on similar worries, and the move today acted
as a continuation of yesterday’s powerful bounce. Summer is typically a period
of high demand for all types of energy, and with gasoline reserves well below
the 5-year average heading into summer, many investors fear that the U.S. will
simply not be able to handle the jump in demand. Natural gas futures fell
about 2% on speculation that current U.S. gas reserves will be able to deal
with summer demand.

Gold rose today about 0.7%, on a weak euro
bounce over the dollar. Gold usually trades inversely to the dollar and with
oil; dollar strength this week led to gold selling, and today’s anemic euro
bounce led traders to buy back gold. Gold is used as a hedge against dollar
weakness and rising oil prices. Copper futures rose about 0.5%, erasing early
losses, after a positive U.S. consumer confidence report was released.

Grains fell across the board. Soybeans were
down fractionally, corn dropped about 0.6% and wheat fell nearly 3%.


U. of Michigan
consumer sentiment index rose to 88.7, versus expectations of 86.2.

John Lee

Associate Editor